Business Strategy Week 3 Flashcards
(strategy scope) business level strategy
single product market focused on competitive advantage
(strategy scope) corporate level strategy
multiple industries and markets simultaneously focused on firms scope and resource allocation
what is strategy formulation?
the act of defining and selecting the most appropriate courses of action to achieve the strategic goals of the organization.
red oceans
market places crowded with direct competitors and substitutes
Blue Ocean strategy
combination of creating value and differentiation while simultaneously pursuing a cost leadership position
single product market
a single product or a single product line or a group of closely related product lines
(grand strategies) - growth
expands industries, market or geographies served. or expands product in current market or new markets
why growth is important
-higher profits and greater returns
-more economies of scale and lower operating costs
-signals firm as industry leader
-mask weaknesses in other parts of firm that aren’t growing
-can be a motivator
(grand strategies) - stability
absence of significant change
justifications for maintaining status quo
-no expected changes in external market or no way to predict so “wait and see”
-need to pause due to recent growth or improve efficiency
-economy requires conserving free cash flow
-mature industry with little growth
(grand strategies) - renewal
absence of significant change
justifications for defensive strategies
-company that is reducing size, in state of decline
-sub strategies - retrenchment turnaround, divestiture, liquidation
bankruptcy
-chapter 7 liquidation
-chapter 11 reorganization
(grand strategies) (growth strategies) concentration
-focus on single product or market
-allows to invest more in production and marketing in that area but risks losses in a drop in demand or increase in competition
(grand strategies) (growth strategies) vertical integration
forward or backward integration - the company acquires operation in the same “production vertical”. owns multiple stages in the “inddustry value chain”: supply chain, manufacturing, distribution, retail
(grand strategies) (growth strategies) horizontal integration
merger of acquisition of companies at the same stage of production in the same industry. when all producers merge, it’s a monopoly. few competitors - oligopoly
(grand strategies) (growth strategies) diversification
a firm enters industry or market different from it’s core business. an increase in the variaty of a firms products, markets ,industries and geographic regions that it competes
(grand strategies) - renewal - retrenchment
short run strategy used for minor performance problems. Retrenchment strategies do not involve bankruptcy.
(grand strategies) - renewal - turnaround
cut costs and restructure organziational operations in one of the renewal strategies, more extensive than retrenchment, sometimes involves bankruptcy
Chapter 11 bankruptcy
the business proposes a plan of reorganization to keep the business alive and pay creditors over time. Often however a business will not emerge successfully from Chapter 11 and will ultimately be liquidated.
chapter 7 ( liquidation)
is not a turnaround strategy. In Chapter 7 the assets of the business are sold to pay off the business ‘s creditors. Essentially investors and creditors alike all lose in a Chapter 7 liquidation.
As an alternative to a renewal strategy, divestiture of a business unit
rid itself of a underperforming asset.
(firm scope) vertical integration
what components of the industry value chain does the firm want to own or control
raw materials, parts/components, manuf. and assembly, marketing sales distribution, after sales service
(firm scope) diversification issue
what will be the scope of products and services offered by the firm?
single product line firms
multiple product line firms
(firm scope) geographic
where should the firm compete geographically?
-local
-regional
-global
resource (capital) allocation
ge mckinsey 9 box matrix
market attractiveness on one axis, comparative business strength on the other axis
(ge mckinsey 9 box matrix) market attractiveness
use results of external analysis
pestel, porter, competitor analysis, market growth rates, market size
(ge mckinsey 9 box matrix) comparative business strength
use results of internal analysis plus relative market share, product benchmarks
industry value chain
the supply chain that provides inputs to the firm and the distribution channels to the firm’s customers
unrelated diversification
when the products and services that a firm diversifies into are different from the firms core products or services
horizonal integration
growth through the acquisition of competitors
related diversification
diversification into areas that are related to your core business
reasons to forward integrate
-lack of access to current distribution channels or poor quality channels
-distributors/retailers have attractive profit margins
-current dist/retailers not reliable or meeting firms needs
-want to interact directly with customer to develop customer insights and new product ideas
reasons to backward integrate
-supplier prices not stable
-suppliers have attractive profit margins
-current suppliers are not reliable or cannot supply the required inputs
-few suppliers with high bargaining power
-supplier product quality is not reliable
benefits of vertical integration
- Facilitates management control over more of the industry value chain
- Supports a differentiation strategy by providing management additional opportunities to create value
- May result in lower costs as intercompany pricing and profit taking is consolidated into one organization. For example the cost to make will be lower than the cost to buy
- Facilitates additional cost controls by coordinating planning across more of the value chain
costs of vertical integration
- May increase costs rather than reduce costs due to “upstream” capacity issues, reduced “upstream” economies of scale and managerial inefficiencies * Requires large amounts of capital to either 1) create the new competencies required in different components of the value chain, or 2) acquire an existing component (i.e. supplier) of the value chain * The firm becomes increasing complex as greater components of the value chain are integrated together.
when should a company vertically integrate?
when cost will be reduced and core copetencies wont’ be eroded or diluted
benefits of vertical integration
-control over the value chain
-lower cost of transactions
risks of vertical integration
-Capacity balancing problems
-expensive
(diversification) strategies
you have the choice between existing or new product and existing or new geography
-product diversification - new products to existing customers
-geographic diversification - existing products to new geographies
-both - new geography and new product (riskiest)
benefits of diversifications
-levarge existing capabilities in new markets and can increase economies of scale and scope
-pursue new growth and profit opportunities
-spread financial risks over different products and markets
–cross subsidize products and or operations
stages of diversification
-single business > 95% of revenue from primary activitiers
-dominant business 70-90% of revenue from primary activities
-related and unrelated lt 70% from primary activities
related vs unrelated diversification
related - diversify into areas with some level of commonality with your existing value chain
unrelated - diversifying into areas that are not nescessarily related to your core operations
Coordination Costs
increase in administrative problems associated with operating different businesses
influence costs
not knowing much about a new line of business can cause managers to be misled by biased but knowledgable business unit managers
diversification
performance increases as you go from single business -> dominant -> related diversification then decreases as you get into unrelated diversification due to coordination costs and influence costs
horizontal integration
horizontal integration happens through mergers and acquisitions
mergers - two competitors join into a new combined firm
acquisition - a larger firm buys a smaller firm and the smaller firms stops existing
when is horizontal integration appropriate?
-a competitor has something that would be cheaper to buy than create yourself
-creates an economy of scale
-the industry has excess capacity when it’s growth is slowing
why do most horizontal integration fail to create economic value?
-they could be blocked by the government
-synergies between two companies never materialize
-acquirer overpays and goodwill created never materializes
what is business level strategy?
goal directed actions managers take to achieve competitive advantage in a single product market
what is business level strategy concerned with?
Monitoring the external environment
* Identifying opportunities and threats
* Developing products and services consistent with the core business and markets
* Developing distinct capabilities and resources
* Aligning and supporting corporate strategic goals
economies of scale
as output increases you initially decrease price per unit until you reach the minimum efficient scale where you have constant returns and then the price per unit increases as you get in to diseconomies of scale
learning and experience curves
for both, you have initial strong returns in price per unit that diminish as you become more experienced or learned
goal of differentiatnion
add unique features that will increase the perceived value of goods or services in the minds of the buyer so that they’re willing to pay a higher price
how does differentiation increased percieved value?
-product design
-complements
-mass customization
-customer service
-customer experience
Firms will tend to concentrate on two primary drivers. A dominant and a differentiator.
what characterisitics do firms that follow a differentiation strategy have?
Deep understanding of target market and unique insights to customer needs and preferences
* Highly skilled and creative product development and marketing teams
* A Powerful sales message and supporting sales structure
* A reputation for innovation and quality
* Capital to finance innovation activities
* A strong and positive brand image
what is the goal of market focus?
differentiate yourself by meeting unique customer needs or lower costs within limited markets
market focus components
-narrow and broad
-cost and differentiation
-cost - focus - cost leadership (narrow) and cost leadershipt (broad)
-differentiation - differentiation (broad) and focus -differeniation (narrwo)
advantages and disadvantages of a focus strategy?
focusing on niches can be helpful because there may be underserved markets able to pay a premium for what they want. on the other hand small markets can present challenges and it may be difficult to differentiate between broad market product and niche
2 questions for vertical integration
will costs be reduced?
will current core compoetencies be eroded or diluted?
what does it mean to be stuck in the middle?
firms that tried to be cost leaders and differentiate ( combination strategies) but failed at both
combination strategy - when it works
some drivers can be used simultaneously to increase value and lower costs
-build products with quality in mind while finding creative ways to reduce costs
blue ocean
-create uncontested market space
-make competition irrelevant
-create and capture new demand
-value innovation to break the tradeoff
-align a new system in pursuit of low cost and differentiation
Achieving a Combination Strategy with Value Innovation
-eliminate- factors that the industry or customer takes for granted. factors that the industry has competed on
-reduce- factors below industry standards to restructure costs
-raise- some factors above industry standards to provide nehanced value
create- factors that the industry never offered before to customers and non - customers
risks of blue ocean strategies
-starting too early
-too new
-too different
-miss read the market
-lacks complements
-firm gives up too soon
the productivity frontier
the trade off between differentiation and cost leadership creates a concave curve. being on the curve represents maximizing strategic positions
not reaching productivity fronteir impolies company is operating at a competitive disadvantage
Value Innovation
decreasing costs and increasing perceived benefits in order to create value
organic growth
growth through innovation in existing products and markets
